Canoo's (GOEV -0.37%) stock soared 53% on July 12 after the electric delivery vehicle maker announced a new deal with Walmart (WMT 0.41%).
Walmart agreed to buy 4,500 of Canoo's Lifestyle Delivery Vehicles (LDVs), which are scheduled to arrive next year, with an option to purchase a total of 10,000 vehicles. Walmart was also granted a warrant that gives it an option to buy 61.16 million shares of Canoo, or more than a fifth of the company's outstanding shares, at an exercise price of $2.15 per share.
As part of this deal, Canoo has promised Walmart that it won't supply any vehicles to Amazon. Canoo is also legally obligated to notify Walmart in writing of any other acquisition offers within 72 hours.
Image source: Canoo.
This partnership with Walmart sounds promising, but it isn't an exclusive one. Walmart also holds similar EV deals with Cummins, Nikola, Freightliner, and Daimler -- so does this deal actually make Canoo's beaten-down stock a buy?
A brief history of Canoo
Canoo was founded in 2017 by Deutsche Bank's former CFO Stefan Krause and BMW's senior executive Ulrich Kranz. Both men previously worked at the EV maker Faraday Future. Canoo released its first prototype van in late 2019, then partnered with Hyundai to develop an EV platform in early 2020.
Kranz took over as Canoo's permanent CEO following Krause's departure in July 2020, and he agreed to take the company public through a merger with the special purpose acquisition company (SPAC) Hennessy Capital Acquisition Corp. IV two months later. Tony Aquila, a member of Canoo's board, was appointed as the company's new CEO last March.
Hennessy's stock initially soared to an all-time high of $22 on Dec. 10, 2020 -- nearly two weeks before the merger actually closed on Dec. 22 -- but its price had fallen to just $8.52 by its first day as a combined company. As of this writing, Canoo's stock trades at about $3.50 a share.
Revisiting Canoo's wild promises
SPACs are different from IPOs because they're allowed to present long-term revenue and profit estimates ahead of their pending mergers. The critics claim that loophole encourages companies which barely generate any revenue to make overly optimistic predictions to attract more investors.
That's why many EV makers which haven't produced a single commercial vehicle went public by merging with SPACs. In an investor presentation from August 2020, Canoo claimed it could grow its annual revenue from $120 million in 2021 to $4.13 billion in 2026, representing a compound annual growth rate (CAGR) of 103%. It also expected its gross profit to soar from $25 million in 2021 to $1.18 billion in 2026, representing a CAGR of 116%.
Canoo expected its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to remain negative through 2023. But in 2024, it expected to generate a positive adjusted EBITDA of $188 million, which would then potentially surge to $522 million in 2025 and $964 million in 2026.
Why did Canoo start sinking?
But in 2021, Canoo actually generated $0 in revenue with an adjusted EBITDA loss of $338 million. It had produced 39 prototype vehicles by the end of the first quarter of 2022, but it still hasn't shipped a single commercial vehicle yet. Its partnership with Hyundai also abruptly evaporated in early 2021 after Canoo stopped offering its engineering services to other automakers.
Canoo still didn't generate any revenue in the first quarter of 2022 and racked up another adjusted EBITDA loss of $117 million. In its SPAC presentation, Canoo had told investors it could generate $329 million in revenue in 2022 with an adjusted EBITDA loss of $249 million.
Canoo also predicted it could build 3,000 to 6,000 commercial vehicles this year, but it's nowhere close to starting mass production yet. It also only held $105 million in cash and equivalents at the end of the first quarter -- so it could simply run out of money before a single vehicle rolls off the production line.
Canoo can still tap a $250 million equity line from Yorkshire Advisors, which would allow it to swap its shares for more cash. It recently secured $50 million in additional funds from CEO Tony Aquila's associates, and its modest debt-to-equity ratio of 0.7 might give it some room for new debt offerings. However, it will still be difficult for Canoo, which is hemorrhaging cash every quarter, to secure more funds at favorable rates in this tough market.
The Walmart deal doesn't make Canoo a buy
Canoo's bold promises prompted the Securities and Exchange Commission (SEC) to launch an investigation into the company last year. It also faces a class action lawsuit regarding its bullish long-term projections and the abrupt discontinuation of the engineering services division -- which had been touted as a major revenue stream before its SPAC-backed debut.
Canoo's deal with Walmart indicates there's still plenty of pent-up demand for its vehicles, but it doesn't seem like it can actually fulfill all those orders. Canoo is also just a single egg in Walmart's growing basket of EV makers -- and it could easily crack open before it ships a single vehicle.
